An Ecology of Agency Arrangements: Mortality of Savings and Loan Associations, 1960-1987

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Haveman, Heather 1992 "Between a rock and a hard place: Organizational change and performance under conditions of fundamental environmental Economic activity is characterized by a multitude of agency relationships: Individuals and organizations known as principals delegate resources and tasks to other individuals and organizations known as agents, since they themselves lack time and expertise (Jensen and Meckling, 1976; Shapiro, 1987), as for example, when individuals delegate to their accountants the task of filing tax returns. Agency arrangements enhance role specialization in a society, connect actors across group boundaries and physical distances, and improve collective action by principals (Luhman, 1979; Zucker, 1986).

Agency relationships may also be collectivized: Anonymous principals can reduce their risks by banding together and entrusting authority to agents who accomplish the tasks delegated to them (Mitnick, 1984). For example, stockholders of a joint-stock company collectively entrust their capital to be deployed efficiently by the managers of the company. Other examples of collectivized agencies include commercial banks, savings and loan associations, mutual savings banks, credit unions, and mutual funds. To assure themselves of reliable performance by agents, principals use diverse ownership arrangements, monitoring systems, and incentives; thus, collectivized agency relationships can take on a wide variety of organizational forms (Jensen and Meckling, 1976; Fama, 1980). In this paper we ask whether organizations with different ways of organizing collectivized agency relationships encounter different survival prospects.

The paper is motivated by three considerations. First, studies of the differential survival of collectivized agency relationships extend the ecological perspective on organizational diversity. Ecological theory frames organizational change as a population-level process consisting of the replacement of existing organizations by new organizations and depicts selection as the mechanism that regulates organizational diversity (Hannan and Freeman, 1977, 1989; Aldrich, 1979; McKelvey, 1982). Despite a vigorously expanding body of research, ecological research on diversity has been criticized for emphasizing issues of specialism-generalism and for failing to examine differences in the survival of different ownership structures (Aldrich and Marsden, 1988: 58; Meyer and Zucker, 1989: 71). Two studies, by Barnett and Carroll (1987)and Barnett (1990), examined the survival of mutual and commercial telephone companies; however, they ascribed the survival of these ownership arrangements to their specialized roles in a technical system. By contrast, we seek to trace the survival of different ownership structures to differences in their governance systems and capital structures.

Second, attempts to connect the survival of agency arrangements to differences in their governance arrangements and capital structures provide an opportunity to link ecological theory with organizational economics. Transaction cost economics, property rights theory, and agency theory also hold that selection processes shape the survival of organizational forms. However, all three perspectives emphasize efficient monitoring and incentives as central to the survival of organizations (Alchian and Demsetz, 1972; Fama and Jenson, 1983a; Williamson, 1975). By contrast, ecological theory holds that although efficiency issues affect organizational change, their impact is constrained by institutional processes such as legitimacy (Hannan and Carroll. 1992). Nonetheless, studies of how population-level change is jointly shaped by efficiency considerations and institutional processes are absent in the literature and sorely needed (Hannan and Freeman, 1989: 339).

Finally, connecting ecological and agency perspectives on organizations is useful because it directs attention to the hierarchical nature of the selection process. To the extent that agency theory focuses on monitoring arrangements in organizations, it emphasizes the selection of strategies and projects within organizations. Thus, agency theory holds that the selection of organizations depends on the efficacy of selection processes within organizations. Further, since selection mechanisms such as accounting and budgeting rules underlie variations in monitoring arrangements, studies of the dissolution of monitoring arrangements require a discussion of micro-level processes even as they draw on larger institutional processes (Zald, 1986: 327-329). Thus, conjoining the agency and ecological perspectives focuses attention on the linkage between micro-level and macro-level selection processes.

Agency Costs and the Survival of Organizations

Agency models treat organizations as sites of contracts between principals (the owners of the factors of production) and agents (those who manage these factors to create goods and services for consumers). They suggest that the most important contracts define the nature of residual claims by principals and allocate the rights to initiate, ratify, monitor, and implement proposals among principals and agents. Because contracts are costly to write, monitor, and enforce among agents with divergent interests, agency costs significantly affect the survival of organizations. The contract structure of an organization in conjunction with the production technology and legal constraints determine the costs at which an organization can meet the needs of consumers. The lower the agency costs of an organization, the more efficient it is and the more likely it is to survive (Fama and Jensen, 1983a).

Agency costs are especially significant in collectivized agency relationships, which are characterized by the separation of ownership from control. This is especially so in joint stock corporations, savings and loan associations, mutual banks, mutual funds, and nonprofit organizations. Since managers as agents have specialized skills and knowledge, they initiate and implement proposals and are compensated for their performance. Principals or owners bear residual risks and enjoy access to the residual left after all payments to agents. They control decisions by ratifying initiatives and monitoring their implementation by managers. However, when many principals exist, residual claims become diffuse, and it is costly for all claimants to be involved in decision control; hence, intermediaries, such as boards of directors, exist to facilitate decision control. As a result, control over decisions is further separated from the people whose resources are at risk, and problems between principals and agents proliferate.

Because agents tend to have more information than principals, they have opportunities to misuse, embezzle, and divert the latter's resources. Principals defuse these hazards by limiting participation in agency relations, internalizing expertise, eliminating agents, spreading their risks, and writing contracts. Moreover, principals seek to control agents by constructing monitoring arrangements and incentive mechanisms to elicit fidelity and cooperation (Fama and Jensen, 1983a, 1983b; Jensen, 1983; Shapiro, 1987: 629-633). More importantly, the characteristics of ownership rights determine whether principals are able to monitor and motivate managers, mitigate conflicts of interest between managers and other stakeholders, and reduce agency costs (Fama and Jensen, 1983c).

When there is a separation of ownership and control, the survival of organizations is determined by the ability of monitoring arrangements and incentive mechanisms to discipline managers and to reduce conflicts of interest between managers and other constituencies. The more efficient the structure of monitoring and incentives, the lower the agency costs of an organization, the greater its comparative advantage over other organizations and the higher its survival prospects when subjected to competition. Conversely, the higher the agency costs of an organizational form, the lower its survival prospects.

When extended to collectivized agencies, the agency perspective predicts that the more efficient the monitoring and incentive systems in a collectivized agency, the lower its agency costs and the higher its survival prospects when exposed to competition. Thus, agency arrangements are selected on the basis of their efficiency, and selection regulates diversity in agency arrangements in a given organizational field (Fama and Jensen, 1983c).

The Survival of Collectivized Agencies

Ecological theory uses the concept of a niche to detail how competition shapes the survival of organizations and regulates organizational diversity (Hannan and Freeman, 1977, 1989; Hannan and Carroll, 1992). In the ecological framework, the fundamental niche of a collectivized agency relationship can be said to consist of the social, economic, and political conditions necessary to sustain the agency arrangement in question. If two forms of collectivized agencies rely on similar resources and institutions for support, then their fundamental niches intersect, and the scope for potential competition is directly proportional to the overlap of their fundamental niches. …

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